UBS Asset Management Says Strong Earnings Can Propel Stocks Despite Higher Rates

UBS Asset Management maintains a positive outlook on global equities, arguing that resilient economic growth and expanding corporate earnings are strong enough to support the ongoing bull market even as the Federal Reserve may keep interest rates higher for longer.

In its latest global multi-asset outlook, the firm highlighted the divide between strong risk assets and challenged bond markets, a dynamic driven by persistent U.S. core inflation.

Economic Resilience vs. Fed Policy

UBS noted that an improving U.S. labor market and accelerating global manufacturing activity continue to underpin the global economy. While lower oil prices may help ease headline inflation, the firm expects underlying U.S. inflation to remain elevated.

This persistence, according to UBS, keeps further interest rate hikes from the Federal Reserve "firmly on the table." The prospect of a more hawkish Fed and higher-for-longer rates creates potential volatility, but UBS believes earnings growth will ultimately support stock valuations.

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Strategic Positioning

Based on its outlook, UBS outlined several key positions for multi-asset portfolios. The firm's Head of Global Multi-Asset Strategy, Evan Brown, emphasized a preference for markets with the best earnings prospects.

• Equities: The firm remains overweight in equities, with a preference for emerging markets and Japan, where its leading indicators point to the strongest earnings growth.
• AI Stocks: Investors should maintain exposure to artificial intelligence-related stocks due to "surging earnings growth." However, Brown cautioned about the need for diversification as the trade becomes more crowded and leveraged single-stock ETFs gain popularity.
• Fixed Income: UBS is cautious on U.S. Treasuries, expecting them to underperform equities. It sees better opportunities in UK and Australian government bonds, where economic growth is slowing.
• Currencies: The U.S. dollar is expected to remain strong, as the Fed is likely to maintain a more hawkish stance than other major central banks.